Rig builders' hopes sink as Brazil's grand oil dreams crumble

Petrobras brought them more pain than gain.

In hindsight, it appears that Singaporean rig builders were wrong to pin their hopes on Brazil's national oil company (NOC) Petrobras.

A report by CIMB analysts Lim Siew Khee and Yeo Zhi Bin said that local rig builders Sembcorp Marine and Keppel Corporation were swept up with Brazil's grand dreams for oil exploration, but Petrobras has brought more pain than gain for the two companies.

"The hope of pre-salt exploration orders from Petrobras before GFC has translated into a burden for the Singapore rig builders today, implicating SMM and KEP in the aspects of weakened order book trend, declining margin as well as higher leverage to finance the construction of these rigs which dominate c.50% of their order book," they said.

Petrobras' ambitions were brought to an abrupt halt by a double whammy of falling oil prices and widespread bribery allegations against its key executives.

"Petrobras suffers from the double punch of debt restructuring and corruption scandals which could take years before we see any resolution. The hope is that the restructuring plan for Sete Brasil will be completed by Oct 15, which means that Singapore yards will only be paid (realistically) in early 2016 for outstanding amounts built up since Nov 14. The progressive delivery schedule of the 13 rigs by KEP (6) and SMM (7) will be postponed beyond 2021," the report noted.

They added that while both yards enjoyed strong margins in 2008/2009, any potential margin benefits seen during GFC would be wiped out this time because around 50% of their order books are dominated by low-margin Sete Brasil contracts.

“KEP and SMM have always been praised for their strong balance sheets due to progressive milestone payments by O&M customers. However, given the post-GFC change in payment mode to bullet payments, working capital requirements are now more strenuous than before. In addition, both yards are in talks with Sete Brasil to finance at least two rigs each which means that gearing is likely to spike by FY17/18,” the report warned.